Executone Information Systems, Inc.

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Executone Information Systems, Inc.

478 Wheelers Farms Road
Milford, Connecticut 06460
U.S.A.
(203) 876-7600

Public Company
Incorporated: 1988 as Executone Information Systems
Employees: 2,400
Sales: $292 million
Stock Exchanges: NASDAQ
SICs: 3661 Telephone & Telegraph Apparatus

Executone Information Systems, Inc. is the third largest supplier of telephone systems to the under 300 desktop voice processing market in the United States. The company designs, manufactures, sells, installs, and supports voice processing systems and healthcare communications systems, while also providing long distance telephone service. Its products, which are used by more than 250,000 businesses across the country, are sold under the Executone, Infostar, IDS, Lifesaver, and Infostar/ ILS brand names through a worldwide network of nearly 200 direct sales and service offices and independent distributors. The only vendor that supplies inbound, outbound, and administrative call processing within an integrated system, Executone has continued to survive and flourish in an intensely competitive deregulated market through its ability to offer customers a complete line of telecommunication services. The company is also believed to be the only telecommunications company other than AT&T to be vertically integrated, controlling all the major elements of its business, including manufacturing, marketing, distribution, installation, service, and support.

In the later decades of the 1900s, Executone’s broad line of services focused on seven product areas. More than two-thirds of the company’s 1994 revenue was derived from the sale, maintenance, and upgrading of the company’s three types of voice processing equipment: traditional telephone systems, which included a number of software applications that supported services ranging from automatic dialing to video display; call center management products, which identified incoming callers and provided outbound callers with a detailed record of contacts; and voice messaging products, which furnish businesses with automated handling of both external and internal callers. A fourth division of the company’s communication products was designed specifically to serve the needs of the healthcare industry, linking patients, nurses, and doctors through microprocessor based systems, intercoms, paging and sound equipment, and room status indicators. During this period, Executone also manufactured locator systems that used infrared transmitter badges to communicate location data to sensors installed throughout a facility, a wide range of videoconferencing systems and services, and a variety of cost-effective telephone services.

What began as a manufacturer of boss-to-secretary intercom systems in 1937, a small business known at the time as Executone, Inc., and grew to become a leading producer of paging devices and intercom systems during the 1950s, represented only one strand of the communications conglomerate’s heritage. Although the Executone name survived throughout the decades, three separate companies were responsible for the formation of the firm as it stood in the 1990s: Executone, Inc., Isotec Communications, Inc., and Vodavi Technology Corporation. As was the case with many companies within the industry that managed to survive both the long era of monopolized telephone service and the deregulation period initiated in the early 1980s, the history of Executone Information Systems, Inc. was marked by legislation, acquisition, merger, and reorganization.

Since the invention of the telephone by Alexander Graham Bell in 1876, AT&T, which owned the Bell Telephone System, dominated the telecommunications industry. As early as 1930, though, the United States Justice Department made attempts to dissolve the mammoth monopoly. Four decades later, they finally brought an antitrust suit against the company. In 1982, rather than face a trial, the world’s largest and richest monopoly agreed to divest itself of its Bell companies and relinquish its control of the local telephone service industry. Two years later, AT&T, the division responsible for long distance phone service, was officially separated from the local Bell companies. Under the terms of the agreement, Bell, which was divided into seven independent companies, could furnish long distance service for a limited time and local service to the customer; however, it could not provide equipment. For the first time, customers not only had the option to pick and choose their benefits and control pricing on their service, but they were also given the freedom to purchase the telephone equipment of their choice.

In an attempt to capture a profitable share of the deregulated market, hundreds of new and existing companies began manufacturing communications equipment. Executone, a subsidiary of Atlanta-based telecommunications conglomerate Contel Corporation since 1979, found its niche as a distributor of telephone systems to small businesses. With annual revenues of $200 million during the mid-1980s, the company grew to become the nation’s largest independent supplier of telephone systems to businesses with less than 200 phone stations. A number of factors, however, brought about a decline in profits that made the company a liability to Contel.

First, increased competition from a more efficient AT&T and a host of others, combined with the strong performance of the dollar overseas, which in turn inflated the price of Japanese electronic components upon which Executone depended, hampered sales and depleted profits. According to some analysts, the movement of company headquarters from Long Island, New York to Atlanta, Georgia in 1985, also contributed to the poor performance of the company. Not only was the transfer expensive, but it resulted in the loss of around 80 percent of its personnel, including many of its senior employees. As well, a rapid turnover in top level management positions, signified by the replacement of six presidents in nine years, prevented the company from developing a coherent management philosophy. Although the company continued to record strong yearly sales increases, it failed to turn a profit for the parent company, losing an estimated $14.7 million in 1987.

As Executone fell deeper into the red, one of its major suppliers, Vodavi Technology Corporation—a $73 million Arizona-based designer and seller of telecommunications equipment founded by Steven Sherman in 1983—and Isotec Communications Incorporated—a newly public $101 million Connecticut-based designer, manufacturer, and marketer of microprocessor-based communications systems for small businesses—joined forces in December 1987 to purchase Executone for a reported $60 million. Under the terms of the agreement, Vodavi and Isotec each acquired 50 percent of Executone with the intention to merge their respective businesses in mid-1988. On July 7, 1988, the shareholders of both Isotec and Vodavi approved the reorganization and merger of Isotec with and into Vodavi. As the only surviving company, if only in a legal sense, Vodavi was renamed Executone Information Systems, Inc.

The management, philosophy, and business strategy of what instantly became the nation’s second largest distributor of small to medium-sized business telephone systems, was supplied by Isotec and its leader, Allen Kessman, who took over as the new corporation’s first chief executive officer. Under his direction, Executone Information Systems followed the course of Isotec’s vertical integration strategy of complete control over product design, manufacturing, marketing, and service, while at the same time intensifying the company’s efforts to diversify its product line and establish and expand its end-user base for post-sales activities. With the merger also came a number of additional benefits: reduced competition through consolidation; increased operating efficiencies from the elimination of duplicate resources; a substantial increase in installed base from combining Isotec’s and Executone’s product lines; a more focused marketing strategy; and a broadening of manufacturing capabilities.

Despite these advantages, the Darien, Connecticut-based Executone, failed to turn a profit in 1989, its first complete year of operation, and continued to struggle as it entered the new decade. In addition to having to contend with the costs and internal reorganizational issues that followed the company’s formation, Executone was further distracted by the United States Commerce Department, which, in response to an AT&T petition, established dumping duties as high as 158 percent for several Far East Asian multiline business communications equipment manufacturers, including Korea’s Goldstar Telecommunications and Oriental Precision Company, two of Executone’s major subcontractors. While the new tariffs significantly increased production costs, market forces prevented the company from raising prices high enough to make a profit in new systems installations.

To offset losses in this area, the company looked to divert its resources from new systems sales to selling additional services to its existing customer base. To that end, in July 1990, the company made long distance service available to its customers on a national basis through its Infostar LD + program, offering its small business customers the added efficiency of a one-stop telecommunications provider and a single point of contact and billing for equipment and long distance service. That same year, the company introduced a new line of PC-based software products, including enhanced automatic call distribution (ACD), predictive of power dialing (also known as out-bound ACD), and integrated voice mail. Finally, the company revitalized its nurse communications product line, which was being used in 60 percent of the nation’s hospitals, and placed more emphasis on its telecommunications contracts with various prisons, especially in California.

In addition to making these technological advancements, the company directed its attention to making its sales force more productive, a necessity in the ultracompetitive telecommunications equipment industry. In April 1991, the company launched a pilot project known as Sales Navigation, designed both to increase the amount of time salespeople would spend in actual face-to-face selling and to “qualify” customers, that is, learning whom to call on and knowing what questions to ask individuals. The new program essentially replaced the time-intensive initial stages of the sales process—those involving the location and evaluation of prospective customers—with a more efficient system. The new system used direct mail, telemarketing, lead-tracking software, and a “sales navigator”—someone who uses the telephone to respond to prospects—guiding them through the complications of investing in phone equipment and providing them with the appropriate follow-up material specific to the needs of their business. At that point, the traditional sales force would take over the “smart lead,” armed with detailed information: what prospects needed, the size of their business, the equipment they were currently using, and who the key decision makers were at the company.

In addition, Executone’s 400 field reps were equipped with laptop computers that not only provided the necessary information, but, through a custom-designed sales information system called Computer-Aided Selling (CAS), they could generate error-free proposals, complete with pricing and profit margin figures. According to Success magazine’s Jenny C. McCune, the new system “transformed selling from an artistic endeavor into a scientific discipline.” CAS also significantly reduced turnover in its sales force: the stress involved in selling big-ticket items in such an intensely competitive market had led many salespeople to quit during their training program, but the new system enabled the company to retain nearly all of its salespeople and even recruit sales personnel from other companies. The effect of automation on the company’s bottom line was also dramatic. While revenues increased only eight percent during the first four years of the program’s use, net income more than tripled, reaching a level of $5.2 million in 1993.

Behind the strength of its fully automated sales force and a number of technological improvements to its diverse product lines, Executone registered its third consecutive year of record-breaking performance, turning in revenues of nearly $292 million and profits of $7.5 million in 1994. Much of the seven percent gain in total revenue was generated through the expansion of the Infostar-LD + program and increased sales of systems upgraded and voice-processing products. One of the company’s most significant and potentially profitable developments during the year was the introduction of the TeleSearch feature to its locator systems. A product designed to improve productivity and efficiency in the office, TeleSearch integrated locating and telephone systems, providing customers with the ability to find personnel immediately and have them return calls quickly from any phone anywhere in the world. Another new product, Care/ Com II-E, a nurse call system, was introduced in the company’s healthcare division, furnishing non-acute care hospitals with a less expensive and smaller version of the company’s more comprehensive LifeSaver system.

To accommodate the growth of the company during the 1990s and to prepare for the future, Executone made a number of organizational changes in 1994. The company moved its corporate headquarters from Darien to Milford, Connecticut, taking over a 150,000 square-foot building formerly leased by IBM, while selling its Vodavi Communications Systems Division to Va Technology Acquisition Corporation for an estimated $10.9 million. Finally, the company added four regional presidents to its management team in an attempt to facilitate more high-level contacts with prospects and customers throughout the country.

Having reduced its debt by almost $80 million between 1989 and 1994, Executone positioned itself well for continued growth through the rest of the decade. Although the telecommunications market remained one of the world’s most competitive, Executone’s commitment to acquiring and developing new technology promised to keep the company near the top of the field. In April 1995, for instance, the company signed a distribution contract with Dialogic Communications Corporation (DCC), the nation’s leading provider of Automated Callout Solutions, for a personal computer-based software application known as “The Communicator,” which was designed to notify personnel via telephone, pager, and facsimile during emergencies. Executone planned to introduce the product—which had been used successfully in nuclear plants, government buildings, military bases, and major corporations—to healthcare providers and correctional facilities. The alliance with DCC also enabled Executone to add the latest in Audio Response Unit (ARU) technology to its cable television and wireless products. With the new ARU II Voice Processing Solution, the company had the capability to usher in a new era the cable television industry, offering customers door-to-door local access and service in nearly any location in America.